Posts Tagged ‘Three Tier’

Why 3 Tier Doesn’t Work Properly

Monday, April 20th, 2009

unbalancedI planned on getting this up this morning, but the sun is out today so I decided to go play on my bike instead, and just upload later.

On Saturday I wrote about how the 3 tier system is built and supposed to function. But as Robert Burns said, “The best laid plans of mice and men, oft go awry.”

The beauty of the 3 tier system is it’s transparency. It’s supposed to eliminate the shady area between the brewer and the retailer by breaking it into basic steps. The problem arises when one of the 3 tiers gains power over the other two. When this happens we’re back to the same corruption we wanted to eliminate.

Back in the days of the big brewers this situation wasn’t as common. If you distributed on a national level you only carried the big beers. Local beers were generally carried by local distributors. The problem is the market has changed, alot. Now there are constantly new beers trying to get shelf space nationally. One thing you often encounter though is that distributors want to carry beers that are easy sales, not necessarily great beers. To compete with this alot of smaller brewers went through smaller distributors. This increased competition between brewers. Another issue is that the distribution networks for the big brewers want to keep their clients happy.

The later issue of keeping BMC happy is one of the interesting ones. Back in the early days of the craft brew industry the big brewers came up with a solution for shutting the little guys out. Since exclusivity contracts where a brewer dictated what you carried were not aloud they decided to offer incentives to distributors that shut the little guys out. This was shady, but perfectly legal, and could have worked. The problem was that as people became interested in craft beer, and public opinion turned against the BMC’s, distributors began to opt out in order to cash in on craft beer. To cope with this the big guys came up with another solution. If you allowed them a decent stake in your company then you got access to their distribution networks. Distributors liked this because they got the perks from the big guys, and they still got to sell craft beer. The problem is now the incentive for distributors to carry the new guys is lessened.

Another issue is what if you have a brew pub? Well according to the 3 tier you have to pay a distributor to legally move your beer from your brew house to the bar. Seem wrong to you too? To overcome this some states have laws that allow brewers to self distribute. The problem comes about when you have a brewery that operates their own pubs. Let’s enter the land of theory real quick. Here in Oregon we have a chain called McMenamin’s. McMenamin’s brewery is located in Portland, but they have breweries and local bars all over Oregon. Now with a self distribute law they could theoretically move beer to all their bars without once paying a distributor. This allows them to sell their beer cheaper at a higher profit. Now what happens to the little guy that wants to get into local bars? He has to go through a distributor while the pub chain doesn’t have to. This raises the price of his beer. Now the local bars that his beer goes to have to compete with a pub that can offer cheaper beer. It is very difficult to preserve the simplicity of the 3 tier system while trying to keep it fair. The more fair it is, the less transparent it becomes.

Remember at the beginning where I alluded that the distributors have power over breweries and retailers? Well here’s where that comes in. While there are laws that prevent distributors from offering incentives to bars this doesn’t always happen. Some distributors have started offering bars things like extra tap lines if the bars will use them as their distributor. While this is illegal it’s sometimes overlooked. This can hurt competition among distributors. Also it doesn’t take imagination to see where distributors who favor breweries can help hamper the competition. This makes distributors some of the most powerful entities in the beer industry. Remember, breweries are required to use distributers.

The biggest issue is one inherent in all things in our country. While the free market isn’t bad when it’s combined with the 3 tier system it makes a difficult situation for brewers. Distributors will inherently carry, and buy more of a beer that sells easy. This is where the selection issueI talked about comes in. With only so much space available for retail distributors won’t be as willing to push your new breweries product while they are carrying known sellers.

This system creates a market that isn’t always friendly to the little guy. So how can the system be improved? Let’s hear some ideas. Should we break it down into more tiers? Less tiers? Get rid of the tiers? Give me some feedback, because I still haven’t thought up a system that’s fair to everyone, and I’m beginning to think it’s impossible.

Three Tier Distribution Is Bad?

Saturday, April 18th, 2009
Image borrowed without permission from Fermentarium

Image borrowed without permission from Fermentarium

With the recent release of “Beer Wars” there seems to be a lot of junk floating around out there about the three tiered distribution system. First off I haven’t seen “Beer Wars”, and I have no desire to see it. Secondly I am not a brewer, distributor, or retailer. So realize that when I talk about the system I’m neither commenting on Beer Wars, nor talking from experience as one of the three tiers. I’m just a lowly consumer who’s spent the day combing through complaints (mostly on wine forums) and doing research on it.

So what is a three tier system and how does it work? The current system comes out of the haydays of alcohol prior to prohibition. Now allot of micro brew enthusiasts will rail on about how great it must have been back in the day when every community had their own brewery. The problem with this is it isn’t true. Well not in the sense that the facts are wrong, but in the sense that it misrepresents the way things were then. The truth was while lack of refrigeration limited the reach of breweries, it didn’t make this utopia situation where the little guy thrived. I won’t get into that except where it has to do with distribution. I will stay focused! Anyway, back then breweries distributed their own beer. Makes sense right? I make my beer, then sell it to the bar, and the bar sells it to you. What could go wrong?

Well alot went wrong. Most people think that people who made alcoholic beverages didn’t really start getting into strong arm tactics until prohibition, but they did, long before. One way breweries did this is similar to the way coal mines operated long ago. In a coal mine you used to rent your home from the company. You also bought all your tools and food, regardless of price, from the company. This was because company money was only good at the company store. Well if you wanted to open a bar or pub back then you went to the brewery. The brewery would help you finance the bar (furniture and the works), and give you beer to sell. In exchange you only sold that breweries beer, and the brewery had control over your bar. You didn’t want to sell the breweries beer then that was fine, they owned the loan on the bar, and you would be replaced. Also in order to retain control of your bar you had to keep the brewery happy. This meant that your sales were supposed to go up, up, and up some more. In order to remain in compitition and increase growth bars had to get your butt in the bar, and they had to get you to drink more, and more beer. Considering this fact, and the overindulgence in alcohol that resulted, it’s not hard to see why many Americans supported temperance. In fact before prohibition many states had decided to dry up on their own because of issues with alcoholism in their communities.

After the 21st amendment was passed to repeal the 18th the ATF went from a police force, to revenue collecting for the government. In order to make it easier to collect taxes, and in order to prevent the abuses that occurred before, they came up with the three tier system. This now meant that the brewery had to sell their beer to a middle man who then sold it to bars, restaurants, and markets. The distributor would also pay the taxes on said beer after purchasing it from the brewery. Another rule was that distributors wouldn’t pimp merchandise from one particular company like the old days. The brewers would pay for all products that were used to get a beer in the hands of a retailer (like samples) and the distributor would only be in charge of shipment. This prevented the person who sold you beer from being able to decide how you run your establishment, or provide incentives for you to carry certain beers.

So under our current system the retailer buys beers from several breweries, then the distributor pays taxes on the beer. Next the distributor goes out and finds establishments that will carry the beer using promotional material payed for by the brewery. The distributor then sells the beer with a mark up to the retailer. The retailer then uses the promotional material that either they bought from the brewery, or were given by the brewery in order to get you to buy the beer at yet another mark up. Did that make sense? Good, because that’s the way it should look in a perfect world. In reality it doesn’t work quite that way, which makes things even messier.  I’ll get around to explaining why this doesn’t work around Monday hopefully since that’s also another lengthy post.